What Drives Energy Use? Prices, Efficiency Policies, and the Demand Frontier

TL;DR

This study analyzes how prices, policies, and efficiency impact U.S. state energy consumption, revealing that pricing and regulation are the main factors influencing cross-state differences.

Contribution

It combines multiple analytical methods to quantify the effects of prices and policies on energy demand, highlighting the importance of efficiency policies in reducing inefficiency.

Findings

12.8% decline in per capita energy use driven mainly by efficiency improvements.

63% of variation in energy use is due to the demand frontier, 34% to inefficiency.

Prices and policies account for significant portions of cross-state energy use differences.

Abstract

What drives cross-state differences in U.S. energy consumption? We combine LMDI decomposition, stochastic frontier analysis, and variable-importance methods on a panel of 50 states plus DC over the 2006--2022 period. The observed 12.8% decline in per capita energy use is driven almost entirely by intensity improvements. A variance decomposition attributes 63% of cross-state variation in log energy use to the demand frontier, 34\% to inefficiency above it, and 3% to noise. Within the frontier, energy prices account for roughly 26% of cross-state variation and state efficiency policies for about 13%, while GDP and climate together explain only around 10\%. Efficiency policies also operate through a second channel by reducing inefficiency, adding a further 6 percentage points to their total contribution. The results suggest that pricing and regulation are the primary drivers of cross-state energy use differences.